Initiatives in Budget 2025 for Urban Development

Context: The Union Budget 2025-26 has announced an 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’ and Inclusive 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.

Initiatives in Budget 2025-26

• Urban Challenge fund: 
  • The government has announced ₹1 lakh crore urban challenge fund to revitalise the cities as growth hubs and creative redevelopment of the cities.
  • This fund will finance up to 25% of the cost of viable urban infrastructure projects, with a stipulation that at least 50% of the cost is funded from bonds, bank loans, and private-public partnerships (PPPs). 
  • An allocation of Rs 10,000 crore is proposed for 2025-26. Cities are expected to raise Rs 40,000 crore through floating municipal bonds, entering into PPPs, and taking loans to complement the government’s funding. 
• National Geospatial Mission: 
  • The Mission will be started to develop foundational geospatial infrastructure and data. 
  • Using PM Gati Shakti, this Mission will facilitate modernisation of land records, urban planning, and design of infrastructure projects.
• Promoting benefits for GIG workers: 
  • The government acknowledged the Gig workers on online platforms as the new-age economy. 
  • The government has announced to arrange for their identity cards and registration on the e-Shram portal. 
  • They will be provided healthcare under the PM Jan Arogya Yojana. This measure is likely to assist nearly 1 crore gig-workers.
• Support for vendors: The budget announced the revamping of the PM SVANidhi scheme to enhance loans from banks, UPI linked credit cards with a Rs. 30,000 limit, and capacity building support.
  • PM SVANidhi was launched in 2020 during the Covid-19 pandemic. 
  • Under the scheme, street vendors can avail themselves of loans of Rs 10,000, Rs 20,000, and Rs 50,000. 
• Housing: SWAMIH Fund 2.0 will be established as a blended finance facility with contribution from the Government, banks and private investors. This fund of Rs. 15,000 crore will aim for expeditious completion of another 1 lakh units.

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.

Fiscal challenge in Urban Development: 

• Shortfall of funds with Urban Local Bodies: 
  • Transfers to urban India primarily occur through three channels — direct transfers to Urban Local Bodies (ULBs); Centrally Sponsored Schemes (CSS); and Central Sector Schemes. There has been a reduction in direct transfers to ULBs. 
  • With the abolition of octroi (a key revenue source for cities) the expectation was that the lost revenue would be compensated through central devolution. However, with the introduction of GST, the source revenue of ULBs fell by over 21%. 
  • This shortfall will force cities to raise their own revenues, and thus burden citizens with additional taxes.

• Budget allocations for Central Sector Schemes (CSS) schemes fall short in the Union Budget 2025. E.g., PMAY (CSS component) saw a 30% reduction in allocation compared to last year. This will place additional financial pressure over the states and the cities.
  • CSS involves cost-sharing between the Union, States, and local governments. 
  • Schemes under CSS: PMAY, Swachh Bharat Mission (SBM), Atal Mission for Rejuvenation and Urban Transformation (AMRUT), and Smart Cities Mission. 

• Issue with Tied funds through CSS:
  • CSS schemes/CSS funds are directly controlled by the Union government and involve conditional transfers, and often have strong political overtones.
  • This often diverts the resources of the state government towards specific projects, thus compromising long-term inclusivity of urban development. E.g., skewed CSS budgetary allocations to Mass Rapid Transit Systems and metro projects. 

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.