27-05-2025
Urban Challenge Fund needs to be utilised to reimagine small towns
Written by Bhuma Raman
India is at the cusp of an exciting transformation in urban development. With the announcement of the Rs 1 Lakh Crore 'Urban Challenge Fund', the Government of India is taking a bold step towards reimagining our cities. This fund, with Rs 10,000 Crore earmarked for the first year, seeks to tackle the most pressing challenges in urban growth and development.
The Urban Challenge Fund is designed to address three aspects. First, to make cities productive and efficient centres of economic growth; second, to develop and redevelop them in a creative way, and third, to improve infrastructure, especially water and sanitation. 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).
According to the World Bank report, over 600 million people are expected to live in Indian cities by 2036, signalling an extensive urban expansion. This growth presents significant opportunities, but also severe challenges. Overcrowding, inadequate infrastructure, housing shortages, and traffic congestion are major concerns in cities like Delhi, Mumbai, and Kolkata. The demand for water, sanitation, transportation, and healthcare is outpacing the capacity of urban systems, leading to inefficient service delivery and environmental degradation. Additionally, millions live in slums without access to basic amenities. Social inequality remains a critical issue, with marginalised groups often excluded from growth opportunities. Moreover, poor urban planning and fragmented governance hinder effective solutions. Addressing these challenges requires sustainable urban planning, investments in affordable housing, improving infrastructure, and embracing technology.
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. The budget allocation of Rs 10,000 crore is far less than what is needed to meet India's urban challenge.
The report also recommends expanding the capacities of city agencies to deliver infrastructure projects. Currently, the 10 largest Urban Local Bodies (ULBs) were able to spend only two-thirds of their total capital budget over the three recent fiscal years. 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.
Between 2011 and 2018, urban property tax stood at 0.15 per cent of GDP compared to an average of 0.3-0.6 per cent of GDP for low- and middle-income countries. Low service charges for municipal services also undermine their financial viability and attractiveness to private investment. Over the medium term, the report suggests a series of structural reforms, including those in the taxation policy and fiscal transfer system, which can allow cities to leverage more private financing. In the short term, it identifies a set of large, high-potential cities that can raise higher volumes of private financing.
Notwithstanding these recommendations, this article argues for investment in the small towns of India for more inclusive growth.
There is strong evidence that India's level of urbanisation is higher than official statistics suggest. This discrepancy arises because peripheral urban areas are often classified as rural in official data. Researchers have proposed alternative estimates by broadening the official definition of what constitutes an urban area. Additionally, population growth in India's megacities has slowed between 2001 and 2011 compared to the previous decade (1991-2001). Further investigation is needed to understand the reasons behind this decline. Recent research in India suggests that large cities are not necessarily the main drivers of economic growth. The limited availability of formal sector jobs in urban areas, beyond those requiring highly specialised skills, has led to 'exclusionary urbanisation.'
As a result, urbanisation in India is becoming more dispersed, with small towns growing at a faster pace than cities between 2001 and 2011. It is now recognised that small and medium towns (S&MTs) can play a crucial role in development by leveraging their cost advantages in manufacturing, including lower production and living expenses. These towns also contribute significantly to the diversification of the rural economy, and their growth is seen as more important than that of cities in reducing rural poverty. S&MTs support rural development by providing essential market services and acting as links between rural and urban areas. Further, the post-Covid trend to adopt collaborative workspaces not only offers new opportunities for remote workers but can also stimulate the development of small and medium towns by fostering new businesses and entrepreneurial activity. They can be seen as valuable components of a town's social infrastructure, potentially contributing to more sustainable and holistic regional development
Nearly 70 per cent of future job growth is expected to occur in cities, especially emerging ones with populations under 1 million, which will drive consumption. With 70 per cent of India's urban landscape for 2030 still undeveloped, significant opportunities arise for domestic and international investments in infrastructure and development. A June 2023 EY report emphasised the potential of small towns, predicting a boost to India's economy. Infrastructure improvements, supportive policies, and a skilled workforce in Tier 2 cities could increase growth from 11 per cent (2019–2023) to 14 per cent (2023–2030). The report identified cities like Visakhapatnam, Jaipur, Vadodara, and Kochi as emerging hubs for Global Capability Centres (GCC), with Coimbatore set to become a major GCC centre by 2030. India's smaller towns have potential for rapid urban growth due to lower costs, skilled workers, and market opportunities, but a lack of infrastructure remains a barrier.
There are barely 100 cities, including metropolises and megapolises, in India as against 7000-plus small towns. These towns are in dire need of investments in infrastructure, provision of essential services including health and education, and employment generation on an emergency footing, which will not only help in shifting labour from agriculture, but also help in reducing the burden of migration on large cities. The ULBs of these small and medium towns also need to undertake capacity-building measures to meet this urban challenge.
The Urban Challenge Fund is an opportunity to tackle the issue of small-town development rather than focusing on large cities. The experience with JNNURM (Jawaharlal Nehru National Urban Renewal Mission) and Smart Cities Mission shows that focusing on large cities does not automatically lead to a ripple effect. The disparities in regional development continue to persist.
The writer is co-convener, Habitat Forum (INHAF)
