How has the Budget allocated funds for urban development? | Explained Premium

Government's urban development strategy focuses on capital-intensive projects, neglecting social equity and sustainable growth in cities.

The story so far: In 2015, the NDA government positioned urban development as a key pillar of its growth strategy as cities contribute nearly 67% to the GDP. However, in the government’s vision for a “Viksit Bharat,” cities seem to be conspicuously absent.

The total outlay for urban development stands at ₹96,777 crore, higher than last year’s Budget proposal of ₹82,576.57 crore. However, if a modest inflation rate is taken into consideration, there is actually a fall in the outlay. The Revised Estimate (RE) suggests that only ₹63,669.93 crore will be spent by March, reflecting an underutilisation rate of 22.9%. One of the biggest shortfalls is in the Pradhan Mantri Awas Yojana (Urban) [PMAY(U)], which had an allocation of ₹30,170.61 crore for FY 2024-25 but saw a drastic cut in RE to just ₹13,670 crore. This highlights a gap between policy ambitions and actual implementation.

The increase in total urban outlay is misaligned with the urgent need to bridge infrastructure gaps in cities. Instead of focusing on employment and sustainable development, the emphasis remains on capital-intensive projects.

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. With the introduction of GST, the source revenue of ULBs fell by over 21%. But instead of increasing support, the share for ULBs has actually declined from ₹26,653 crore last year to ₹26,158 crore this year. This shortfall will force cities to raise their own revenues, burdening citizens with additional taxes.

CSS involve cost-sharing between the Union, States, and local governments. Some major urban programs under this category include PMAY, the Swachh Bharat Mission (SBM), Atal Mission for Rejuvenation and Urban Transformation (AMRUT), and the Smart Cities Mission. However, the Budget allocations for these schemes fall flat. The PMAY (CSS component) saw a 30% reduction in allocation compared to last year; the allocation for AMRUT and the Smart Cities Mission combined which came about to 10,400 crore in the previous budget decreased this year with almost no money left for the Smart Cities Mission; and while the SBM (Urban) retains the same outlay as last year at ₹5,000 crore, RE indicates that only ₹2,159 crore will be spent — 56% less than allocated amount.

Central Sector Schemes are directly controlled by the Union government and often have strong political overtones. A major share of such urban development is directed toward capital-intensive infrastructure projects, particularly metro rail expansion. Unlike other urban initiatives, metro projects have seen increased allocations. In FY 2024-25, the budget for Mass Rapid Transit Systems and metro projects was ₹21,335.98 crore. The RE has now risen to ₹24,691.47 crore. Additionally, the 2025-26 Budget proposes ₹31,239.28 crore, reflecting a 46% increase over the previous year. Prioritising metro rails over comprehensive urban mobility raises concerns about the long-term inclusivity of urban development.

A new Urban Challenge Fund of ₹10,000 crore has been introduced in the Budget. The government has set an ambitious target of ₹1 lakh crore to implement urban redevelopment programs. However, half of this funding is expected to come from private investments — an over-optimistic approach given the sector’s negligible contribution to the Smart Cities Mission.