The Urban Challenge Fund- Fuelling Growth of Cities

The Union Budget 2025-26 has set the stage for transformative urban development with the introduction of the Urban Challenge Fund, allocating ₹1 lakh crore to reimagine cities as growth hubs. This ambitious initiative aims to foster creative redevelopment, improve water and sanitation infrastructure, and propel cities into the future as engines of economic progress. This move follows the earlier proposal in the July 2024 budget, signalling a continued commitment to urban innovation.

How The Urban Challenge Fund Will Work ?

The fund aims to finance up to 25% of the costs for viable urban projects, with a condition that at least 50% of the funding comes from bonds, bank loans, or public-private partnerships (PPPs). For the upcoming fiscal year, ₹10,000 crore has been allocated to get these projects underway. This funding model echoes with few previous urban development initiatives involving Viability Gap Funding under specific conditions.

Read More | FM Sitharaman Doubles Down on Urban Reforms, Announces Rs 1 Lakh Crore Fund

What Are Potential Areas of Investment?

While detailed guidelines are yet to be announced, the fund is expected to support projects focusing on integrated development, covering critical infrastructure components in categories of Transport and Logistics, Energy, Water and Sanitation, Communication, Social and Commercial Infrastructure. Land assembly costs will remain the responsibility of state governments, but capital investments in economic infrastructure, such as industrial building/zones and facilities supporting manufacturing and knowledge industries, are likely to be eligible.

The scheme might also allow for the convergence of funds from existing urban development programs. However, clarity is needed on whether funds from pre-existing schemes will count towards the 25% funding cap or be treated separately, potentially increasing the overall subsidy.

Read More | 72% of Urban Wastewater in India Flows into Water Bodies, Land Untreated: Report

Will Private Sector Participate?

The big question is whether the private sector will embrace this opportunity. Typically, private investors are comfortable taking on demand and performance risks but tend to shy away from external risks like governance issues, regulatory uncertainties, or law and order concerns. This explains why sectors like roads, energy, and ports attract more private investment compared to water supply and sanitation, where regulatory frameworks are less stringent.

International examples show that even small businesses, equivalent to India’s MSMEs, can play significant roles in delivering basic services when institutional and regulatory environments are supportive. The key is to ensure that governance mechanisms are robust enough to foster confidence among investors.

Read More | Private Sector R&D Remains a Focus of FM Sitharaman’s Budget

The Key to Success: Ownership and Collaboration

For this initiative to succeed, state and city governments must take ownership of the economic outcomes linked to these projects. Global experiences highlight that when industries and governments collaborate closely, economic development goals are more likely to be achieved. This proactive partnership model, where public entities facilitate growth and the private sector drives it, should be the foundation of the Urban Challenge Fund’s approach. Another aspect is capacities and role of of Urban Local Bodies in economic and social development of urban centres. This responsibility has rarely been executed effectively and strengthening this aspect of urban governance will be essential for the success of the fund.

Read More | Economic Survey Critical Of Private Sector's Low Spend On R&D

Moving Forward with Hope

While implementing such a large-scale challenge fund will undoubtedly come with hurdles, these can be overcome with careful planning and collaboration. The budget announcement is just the beginning; in the coming weeks, policymakers, industry leaders, and urban planners will need to work together to refine the scheme’s details.

If executed well, the Urban Challenge Fund could transform India’s cities into vibrant, sustainable growth hubs, aligning with the vision of Viksit Bharat 2047 and addressing the complex social, economic, and political challenges facing urban India today.

(Disclaimer: The views expressed in this article are solely those of authors --- Aarti Harbhajanka, MD & Co-Founder, Primus Partners and Shubham Katyayan, VP – Housing and Urban, Primus Partners.)